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Consensus Mechanisms in Bitcoin

*Note: These insights were compiled by Meltem Demirors, who is an employee of DCG. They do not reflect DCG’s position on these issues, and are intended to provide context in an objective manner.

The team at DCG certainly has thoughts on the issue of scaling bitcoin and achieving technical and non-technical consensus within the bitcoin community. One thing we all agree on is that it’s certainly been a bit of a show for those outside who are looking in, but we strongly feel there is less contention around bitcoin, the development of the protocol, and the direction of its future than there has been in recent months. In terms of taking a stance – we have not one so publicly, as we are still assessing both sides of the issue and have companies in our portfolio who are divided in their views.

The reason Bitcoin is highly secure is that there is no one person that controls it, or the codebase. At the moment, there is a broader communication issue between what the community and the businesses building with bitcoin need and what the technical community thinks is best.

Mapping Bitcoin Stakeholders

The bitcoin community consist of various stakeholders who all have different goals and incentives. A deeper understanding of some of the questions around bitcoin’s development require a deeper look into the interactions between these stakeholders. This is a summary of this stakeholder landscape, and further clarification is provided below.

Miners

Miners secure the bitcoin network and process blocks of transactions by doing complex computational work. Miners use computing power and electricity to process transactions and in return, receive a bitcoin “reward” and transaction fees. Miners effectively maintain the bitcoin network and run the supporting “software,” so if and when a certain % of the Bitcoin nodes run a new protocol (like Bitcoin Classic or Bitcoin XT), then a 4 week grace period will begin and that will be the new version of Bitcoin. One of the debates is what percentage of miners will be able to move the network to a new protocol. It currently stands at 75%, but many in the community are advocating for 95% to create the need for greater consensus and minimize the majority influence of a small group of miners.

There are four major miners who command 75% of the hashing power needed to “force” a migration to a new protocol – although again, this could change if the community agrees to set the majority needed at 95%. This includes 3 mining pools, which consist of a pool and a mining equipment manufacturer running their own equipment. The distribution of mining power, or the “hash rate,” can be seen on blockchain.info

It’s important to note that people can also run bitcoin nodes without participating in mining activity. A wide distribution of nodes in the bitcoin network is what creates the system’s economic strength and security. There are currently around 5,500 nodes in the bitcoin network, and around 200 of them are mining nodes. The company 21.co, which creates light mining equipment on a programmable bitcoin interface, runs a site called BitNodes which tracks all the reachable nodes in the bitcoin network. We will be hosting a workshop later this spring to help interested parties build and run a node so more people can participate in maintaining and securing the bitcoin network should they choose to do so. There are also lightweight pre-built nodes like BitSeed that can be purchased (with bitcoin) on Purse.io.

Core Developers

Bitcoin is free software and any developer can contribute to the project. From a technical perspective, the developer community consists of numerous talented developers who have spent countless days and written thousands upon thousands of lines of code to develop bitcoin, by creating solutions known as Bitcoin Improvement Protocols or BIPS, or by creating new iterations of bitcoin which are entirely new protocols run by the miners. The term “Bitcoin Core Developer,” however, has a real technical meaning. It refers to those who have been selected to maintain and manage Bitcoin Core through the meaningful contributions they have made. They receive no compensation for this work.

Within the developer community, there are 5 Bitcoin Core Developers who are the technical maintainers of bitcoin. The first Bitcoin Core Developer was Gavin Andresen, who was “chosen” by Satoshi Nakamoto, the anonymous author of the Bitcoin white paper, to maintain the bitcoin protocol. There are currently five core developers, all of whom have contributed significant amounts of time and code to developing bitcoin on a pure volunteer basis. You can view the contributions of these developers on GitHub, a software collaboration platform.

The core developer community is working on developing various fixes for issues in the current bitcoin protocol, one of which is the size of blocks (which in turn influences how quickly transactions are processed), but includes many other technical and practical questions that exist now or will develop over time as transaction volume increases, There is an alternative group of developers who have developed a protocol called Bitcoin Classic. The core developers – volunteers who are true domain experts and are responsible for maintaining and managing the bitcoin codebase – are not all in agreement that implementing Bitcoin Classic is the best path forward, and have suggested the community continue to “wait” while they develop technical consensus on the path forward between the core developers.

Companies

Companies currently have no formal way of participating in decision making around the bitcoin protocol, other than building their products on alternative protocols like Ethereum, developing their own protocols, or lending their support to bitcoin protocol initiatives like Bitcoin Classic. There have been a number of community meetings like the Scaling Bitcoin conferences that have created dialogue between miners, developers, and companies, but there is still no formal mechanism or way for companies to participate in decision making regarding the core bitcoin protocol.

Investors, Users, and Other Stakeholders

There is a final group of stakeholders which has no formal way of participating in technical decision making, other than providing analysis, commentary, and financial, social, or political support.

Where DCG Stands

At DCG, it is our belief that our role in the community is to observe and facilitate dialogue that will help create consensus and potential resolution, but we will not advocate for a particular solution.

“Of course, there are significant hurdles that still exist for the bitcoin blockchain, but I take great comfort in knowing that many of the best and most creative minds in the world are enthusiastically dedicating their time, resources and reputation towards helping to build a highly scalable, secure, open bitcoin blockchain network.”

We believe in blockchain technology and more importantly, bitcoin as a currency and financial rail. We have invested in 63 companies across 20 countries to date, and we firmly believe in those entrepreneurs we have backed and their vision for the future.

There are many people working on bitcoin’s codebase who disagree on issues, but they resolve them through dialogue and a consensus-seeking approach. Bitcoin will only become stronger as we begin to answer questions regarding governance and consensus, precisely because bitcoin cannot be controlled by one singular entity or single person who wants to dictate how it should develop.

Please feel free to share your feedback with us by sending a note to info@dcg-insights.co